Atlanta Fed Sees 1.7% Q4 GDP Growth (New Home Sales Were Strong)

GDP Nowcast Revised Much Higher

Q4 GDP growth has changed dramatically partially because of the recent advanced indicators reports. We have good news on trade, housing, and inventories which means GDP growth is on pace to be closer to 2% rather than below 1%. This was reflected in the Wednesday update of the Atlanta Fed GDP Nowcast.

As you can see from the chart below, it was revised from 0.4% growth to 1.7% growth. That’s the difference between terrible, borderline recessionary growth and near normal growth for this weak expansion. It went from way below the consensus to slightly above it. 

Real final sales growth will probably still be weak, but at least the headlines won’t blare out about a possible recession. It’s also possible that inventories could be being built to help deal with the potential rise in sales in 2020. Your opinion on stocks all depends on how you see 1H 2020 playing out. It could either be a recovery or a further decline in growth which would potentially put the economy near a recession.

Details Of The Changes To The Nowcast

Let’s look at the actual changes in the categories that moved the overall estimate. These changes should be similar in the Friday updates from the NY Fed and St. Louis Fed. Estimates for real gross private domestic investment increased from -3% to -1.7%. Business investment has been likely be a drag on Q4 GDP growth. That’s because non-defense capital goods orders ex-aircraft have been weak. 

It’s an important explanation because Q4 GDP growth is likely to not be strong even if consumer spending is strong. It might confuse some people how GDP growth could be below 2% even with a solid consumer and housing market. On the other hand, one might wonder how GDP growth could be below 2% with a strong consumer. It’s easy to be confused because none of the data has come out. We have complete data from October, but sparse hard data from November.

Estimate for real personal consumption expenditures growth increased from 1.7% to 2%. It could increase further once we get data from November and December. Originally, investors had been calling for GDP growth to be closer to 2% because of an improvement in consumption growth. But instead we got that great data on inventories and trade. 

That being said, the results of that forecast haven’t come out yet. If the consumer has a great enough holiday season to boost consumption growth estimates to 2.5%, we could have above 2% GDP growth. That’s not amazing growth, but it is very strong for what could be the trough of this slowdown. 

Finally, trade helped the Nowcast. Estimated contribution of net exports to GDP growth was revised from -0.2% to 0.39%. It’s not great to see exports and imports fall, but if imports fall more than exports, GDP growth will be helped.

Strong New Home Sales In September & October

This has been the best 2 month stretch of new home sales since 2007. I say the October report was strong mostly because the September reading was revised much higher. It is the new cycle high. New home sales in September were 738,000 instead of the initially reported 701,000. New home sales don’t hit a cycle high in recessions. We are far from one. 

And new home sales metric is one of the earliest leading indicators as it peaks a median of 28 months before recessions based on data since the late 1960s. New home sales peaked in July 2005. That’s 28 months before the recession that began in December 2007. 

3 month average of new home sales is at a 12 year high which means a recession isn’t close. Business investment will be weak in Q4, but real residential investment will help GDP growth for the 2nd quarter in a row after it previously hurt GDP growth for 7 straight quarters.

New home sales in October were 733,000 which beat estimates for 707,000 and the high end of the estimate range which was 720,000. October yearly new home sales growth was 31.6% partially because of weak comps. That is the highest yearly growth rate since January 2013. The key to new home sales boosting GDP growth is sales leading to new construction. 

Construction is what affects growth. Sales alone don’t generate much of an impact on GDP. Future housing starts should be strong because permits were strong in October.

Inventory has fallen from its recent peak in December 2018 which was 7.4 months. There are now 5.3 months of inventory which means there is room for more housing construction. Housing construction is limited by pricing; the median new home price fell 3.5% yearly in October. Weak pricing and low rates are driving housing demand. If prices increase and boost construction, there could be weakness in demand. 

More new homes constructed means more supply which raises inventory and pressures prices. Also, remember that new homes cost way more than existing homes, so they aren’t exactly affordable for first time millennial home buyers. It’s interesting that despite the decline in new home prices, permits are at a 12 year high.

Conclusion

All the tracking estimates for Q4 GDP growth will be higher when they are updated. The economy isn’t better than it was before this slew of data updates, but GDP growth is on a stronger pace. We can no longer look at the amazing difference between the recent stock market performance and the GDP tracking estimates. 

The possibility of a big spike in stocks and below 1% GDP growth was epic. That won’t happen as many projected. We didn’t project it because of inventory investment and trade. So we don’t deserve much credit for that call. New home sales were very strong in September and October. This signals the next recession could be 2 years away or longer. 

Spread the love

Comments are closed.